How the United States and the European Union Can Improve Cooperation on Trade

On March 9, the first meeting between U.S. Trade
Representative (USTR) Robert Zoellick and European Trade
Commissioner Pascal Lamy will take place in Washington. This
encounter offers the United States and the European Union (EU) an
opportunity to lay new groundwork for settling their trade disputes
and improve cooperation on worldwide trade liberalization,
particularly through the World Trade Organization (WTO). Both the
United States and the EU have received favorable rulings from the
WTO, sometimes at the other's expense, and this has led to the
disputes that will likely headline the meeting. Both also have
ignored the WTO's decisions when they proved unfavorable. As the
world's largest trading partners, both sides should take a step
back to consider the effects that these continuing disputes are
having on their overall relations, trade liberalization, and the
WTO itself.

Resolving the Trade DisputesEach year, the United States imports $195 billion from the
European Union and exports $151 billion in return. The ongoing
disputes between the two over such issues as trade in bananas,
genetically modified food, Airbus subsidies, and subsidies to
foreign sales corporations have escalated rapidly over the past two
years and, unless these trading partners can come to terms, could
degenerate into a trade war. The impact of such a war would be
large. If the volume of cross-Atlantic trade is significantly
reduced, economic growth on both sides will suffer.

If
the United States and the EU continue to bring such disputes before
the WTO and then disregard its rulings--as they have in the banana
trade and anti-dumping cases, for example--the WTO's credibility as
an international arbiter will decline, and its value as a mechanism
for reducing trade barriers among its 140 member countries will be
diminished. It is imperative that the WTO's economically strongest
members abide by its rulings, however politically unpalatable they
may be.

To
resolve these disputes, Lamy and Zoellick should each recommit to
abiding by WTO rulings. They should also each recognize the
political sensitivities of these disputes and allow the other side
sufficient time to arrive at a solution. Doing so would allow both
the United States and the EU to honor their WTO commitments while
increasing the ability of the institution to resolve trade
disputes.

Reducing Barriers to TradeAt the March 9 meeting, the United States and the EU should
also discuss how to achieve a new WTO round of multilateral trade
negotiations. A successful new WTO round would lower trade barriers
currently maintained by the 140 WTO member countries, which would
lead in turn to increased worldwide economic growth. To increase
the probability that a new WTO round will be successful, however,
the United States and the EU must address the issues facing
developing countries. In fact, one reason that the WTO meetings in
Seattle in 1999 failed was precisely because the United States and
the EU failed to grant improved market access to developing
countries.

Both
the United States and the EU have passed legislation meant to
increase market access for developing countries. The EU recently
proposed duty-free access to its market for 48 poor countries in
the "Everything But Arms" plan. The United States enacted the Trade
and Development Act of 2000 (P.L. 106-200) to increase access to
the U.S. market for poor African and Caribbean countries. However,
both of these initiatives offer only limited improvements in access
to sectors that would help these developing countries the
most--textiles and some agricultural goods in the U.S. market and
sugar, rice, and bananas in the EU. Moreover, both efforts serve
domestic protectionist interests far more than they promote
economic development in poor countries. For example, under the EU's
proposal, tariff reductions on rice and sugar would not even begin
until 2006. Since 2006 is also the year in which the Common
Agricultural Policy (CAP) is due for its next review, the
likelihood that those tariffs will be eliminated or even reduced is
slim.

Aside from denying market access to
developing countries, the CAP is very costly to the EU and to the
world economy. According to economists Brent Borrell and Lionel
Hubbard, the total annual cost of the CAP to the world economy is
around $75 billion. Two-thirds of the cost ($49 billion) is borne
by Europeans in the form of higher prices, inefficient production,
and economic distortions. The remainder--about $25 billion, which
is roughly equal to the total output of Ethiopia, Ghana, Uganda,
and Zambia combined--falls on countries outside the EU in the form
of lost agricultural export opportunities in Europe.

Similarly, the United States maintains
barriers in the textile and apparel sector that impose enormous
costs on U.S. citizens as well as on developing countries.
Economists at the Institute for International Economics estimate
that U.S. consumers would save up to $24.4 billion, or
approximately $257 per household, if these barriers were
eliminated. At the same time, according to Robert Feenstra of the
University of California at Davis, the annual cost to foreign
countries imposed by the continued maintenance of U.S. textile and
apparel barriers ranges from $4 billion to $15.5 billion.

The
European CAP and U.S. textile and apparel barriers are a
significant burden on the world economy and clearly an impediment
to trade liberalization. Zoellick and Lamy should begin to lay the
groundwork for reforming the CAP and eliminating U.S. textile and
apparel barriers. Both initiatives would be politically difficult,
but by beginning the process, the United States and the EU would be
sending a signal to developing countries that they are serious
about trade liberalization. Furthermore, by giving greater market
access to developing countries, the United States and the EU would
benefit economically and would be increasing the probability that
developing countries would agree to a new WTO round.

ConclusionThe United States and the European Union deserve praise for
developing policies to reduce barriers to their markets, but unless
tariffs are lowered and quotas abolished, the effectiveness of the
Trade and Development Act and the Everything But Arms proposal will
be limited. The United States and the EU have an excellent
opportunity on March 9 to advance the cause of trade liberalization
and lay the groundwork for resolving their bilateral trade disputes
while increasing the probability of a successful new WTO round.

Clearly, trade liberalization is one issue
upon which both sides should be able to act constructively. But
both sides must realize that resolving their disputes will take
time and that they should therefore begin the process immediately.
This first meeting is the time to develop strategies for achieving
mutually beneficial goals. The world will benefit from their
example.

Rep. Peter Roskam (R-IL) says it's "a great way to start the day for any conservative who wants to get America back on track."

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